Canoo Inc. Quarterly report pursuant to Section 13 or 15(d)

Quarterly report pursuant to Section 13 or 15(d)

Fair Value Measurements

Fair Value Measurements

6 Months Ended

Jun. 30, 2024

The following table summarizes the Company’s assets and liabilities that are measured at fair value on a recurring basis as required by ASC 820, by level, within the fair value hierarchy as of June 30, 2024 and December 31, 2023 (in thousands):


	June 30, 2024
	Fair Value		Level 1		Level 2		Level 3
Liability
Contingent earnout shares liability	$	—	$	—	$	—	$	—
Derivative liability, current	$	—	$	—	$	—	$	—
Convertible debt, current	$	47,228	$	—	$	—	$	47,228
Derivative liability, non-current	$	33,242	$	—	$	—	$	33,242
Warrant liability, non-current	$	55,995	$	—	$	55,995	$	—


	December 31, 2023
	Fair Value		Level 1		Level 2		Level 3
Liability
Contingent earnout shares liability	$	41	$	—	$	—	$	41
Derivative liability, current	$	860	$	—	$	—	$	860
Convertible debt, current	$	16,052	$	—	$	—	$	16,052
Derivative liability, non-current	$	25,919	$	—	$	—	$	25,919
Warrant liability, non-current	$	17,390	$	—	$	17,390	$	—

The Company’s Contingent Earnout liability, convertible debt, derivative liabilities are considered “Level 3” fair value measurement. Refer to Note 2 for discussion of the Company’s methods for valuation.

The Company entered into the Ninth Pre-Paid Advance, Tenth Pre-Paid Advance and June Prepaid Advance as discussed in Note 9, whereby the Company elected to account transactions under the fair value option of accounting upon issuance. The Ninth Pre-Paid Advance was fully paid off as of the end of the reporting period. The Company estimated the fair value of the Tenth Pre-Paid Advance and June Prepaid Advance based on assumptions used in the Monte Carlo simulation model using the following inputs as of the end of the reporting period:


	Tenth Pre-Paid Advance			June Prepaid Advance

Stock price	$	2.13		$	2.13
Risk free interest rate	5.4		%	5.3		%
Interest rate	5.0		%	5.0		%
Expected volatility	116.7		%	144.0		%
Expected dividend yield	—		%	—		%
Remaining term (in years)	0.2			0.5

Following is a summary of the change in fair value of the Convertible Debt for the six months ended June 30, 2024 and June 30, 2023 (in thousands).


	Six months ended June 30,
Convertible Debt	2024		2023
Beginning fair value	$	16,052	$	—
Additions during the period	46,894		—
Payments in cash and common stock during the period	(57,241)		—
Change in fair value during the period	41,523		—
Ending fair value	$	47,228	—

As the proceeds of the freestanding instruments identified within the Ninth Pre-Paid Advance exceeded the fair value, a gain on issuance on convertible debt was recognized. As the fair value of the freestanding instruments identified within the Tenth Pre-Paid Advance and June Prepaid Advance exceeded the proceeds received, losses on issuance on convertible debt were recognized. Refer to Note 9 for further information.

The Company has a contingent obligation to issue shares of Common Stock to certain stockholders and employees upon the achievement of certain market share price milestones within specified periods. Issuances are made in three tranches of approximately 0.2 million shares, for a total of 0.7 million shares, each upon reaching share price targets within specified time frames from December 21, 2020 ("Earnout Date"). The first tranche was not issued given the share price did not reach the specified threshold as of December 21, 2022. The second tranche will be issued if the share price reaches $575.00 within four years of the closing of the Earnout Date. The third tranche will be issued if the share price reaches $690.00 within five years of the Earnout Date. The tranches may also be issued upon a change of control transaction that occurs within the respective timeframes and results in per share consideration exceeding the respective share price target. As of June 30, 2024, the Company has a remaining contingent obligation to issue 0.4 million shares of Common Stock.

Following is a summary of the change in fair value of the Earnout Shares liability for the six months ended June 30, 2024 and June 30, 2023 (in thousands).


	Six months ended June 30,
Earnout Shares Liability	2024		2023
Beginning fair value	$	41	$	3,013

Change in fair value during the period	(41)		(2,564)
Ending fair value	$	—	$	449

The Company entered into a Lease Agreement ("Lease Agreement") with I-40 OKC Partners LLC ("I-40") which contained a "Market Value Shortfall" provision that meets the definition of a derivative, valued at $0.6 million at inception. The shortfall expired in April 2024, upon which the Company recorded a gain on the derecognition of the liability of $1.6 million. The amount was included within Gain (Loss) on extinguishment of debt and other. The fair value of the Market Value Shortfall derivative measured as of December 31, 2023 and immediately prior to expiration was $0.9 million and $1.6 million, respectively, resulting in a loss of $0.7 million during the six months ended June 30, 2024 which is included within Gain on fair value change in warrant and derivative liability.

The Company entered into the Series B Preferred Stock Purchase Agreement with the Series B Preferred Stock Purchaser whose conversion feature meets the definition of a derivative liability which requires bifurcation (refer to Note 13). The Company estimated the fair value of the conversion feature derivative embedded in the Series B Preferred Stock Purchase Agreement based on assumptions used in the Monte Carlo simulation model using the following inputs as of the end of the reporting period: the price of the Company’s Common Stock of $2.13; a risk-free interest rate of 4.4%; expected volatility of the Company’s Common Stock of 117.5%; expected dividend yield of 0.0%; and remaining term of 4.28 years. The fair value of the conversion feature derivative measured as of December 31, 2023 and June 30, 2024 was $25.9 million and $14.7 million, respectively, resulting in a gain of $11.2 million during the six months ended June 30, 2024 included within Consolidated Statement of Operations.

The Company entered into the Series C Preferred Stock Purchase Agreement with the Series C Preferred Stock Purchasers (as defined in Note 13) whose conversion feature meets the definition of a derivative liability which requires bifurcation. The Company estimated the fair value of the conversion feature derivative embedded in the Series C Preferred Stock Purchase Agreement based on assumptions used in the Monte Carlo simulation model using the following inputs as of the end of the reporting period: the price of the Company’s Common Stock of $2.13; a risk-free interest rate of 4.3%; expected volatility of the Company’s Common Stock of 117.5%; expected dividend yield of 0.0%; and remaining term of 4.77 years. The fair value of the conversion feature derivative measured as of issuance and June 30, 2024 was $24.9 million and $18.5 million, respectively, resulting in a gain of $6.4 million during the six months ended June 30, 2024 included within Consolidated Statement of Operations.


	Six months ended June 30,
Derivative liability	2024		2023
Beginning fair value	$	26,779	$	—
Additions during the period	24,857		—
Derecognition of liability upon expiration of agreement	(1,604)		—
Change in fair value during the period	(16,790)		4,359
Ending fair value	$	33,242	$	4,359

Refer to Note 15 for discussion related to warrants fair value measurements.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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